Department of Justice Opens Probe Into Metal Warehousing

The Department of Justice has initiated a probe into the metals warehousing industry, people familiar with the matter told Josephine Mason of Reuters. The move comes after multiple complaints by aluminum consumers like The Coca-Cola Company (NYSE:KO) that storage firms run by major Wall Street banks have worked to inflate market prices.

The Department of Justice has sent letters to at least two Wall Street banks that own warehouses. The DOJ is inquiring about practices that caused metal supply shortages, pushing the costs by billions of dollars. A source told Reuters that the Department of Justice has issued inquiries to at least one metal consumer. Earlier this week, Goldman Sachs Group, Inc. (NYSE:GS) denied allegations that its metal warehousing division Metro Trade International manipulates aluminum market to push up profits. JPMorgan Chase & Co. (NYSE:JPM) has also purchased several metals warehouses over the past three years.

Department of Justice assessing further action

Sources said that the DOJ has opened a probe to assess if it needs to take any further action. It is still unclear how broad the probe is, or whether it will result in formal charges. Antitrust experts say the Department of Justice would launch a formal investigation only if it finds that metal warehousing firms have indeedviolated antitrust laws.

A group of aluminum users led by MillerCoors LLC claim that higher prices have put an extra burden of about $3 billion a year on consumers. Apart from the DOJ, the London Metal Exchange and the U.S. Commodity Futures Trading Commission have also taken strict action. LME has overhauled its warehousing policy, to become effective April next year. CFTC last week told metal warehousing firms to preserve all documents related to their business.

Big banks who own metal commodities under threat

There have also been concerns in Washington about ownership of metals warehouses and other commodity assets by banks. Consumer groups, government officials and companies have been attacking banks that trade physical commodities. They argue that financial institutions have been exerting influence on raw materials markets.

Sen. Sherrod Brown (D., Ohio) recently said that he will put pressure on banks about their commodity holdings. Senator Brown’s comments came after many metal consumers alleged that banks have deliberately created shortages of metals like aluminum for their own financial benefit. The Federal Reserve has reportedly reviewed its 2003 permission to banks to participate in commodity markets.